DropShipping Business Model Explained

Drop Shipping

A drop shipping business is one where you can promote a wide range of products in a given market, but without ever having to keep a single item in inventory. Instead, when your customers order a product it’s shipped directly to them by your manufacturer or wholesaler, and you then deduct your wholesale product cost from your sale price, leaving you with a comfortable profit.

The start-up costs for this business model are almost non-existent, and the business can be operated from anywhere in the world you have a computer and an Internet connection.

One of the main benefits of this type of business is that never have to risk any of your own money in holding stock of a range of products which might not sell. This makes drop-shipping a low-risk, low-cost business to start, and you don’t’ need to be an expert in international shipping or commerce to get started running your own business.

Your Ecommerce business acts as an intermediary between members of the public who want to order something they can’t find anywhere else, and manufacturers who are always looking for new customers.

Drop shipping can be very profitable if you hit the right market, and is fully scalable, so you can build a business of whatever size you want.

How Drop-Shipping Works

Drop shipping is a business where you sell products manufactured by another company, but without ever holding stock of those products. You accept orders from interested customers, and those orders are then sent directly to your wholesaler or manufacturer.

Once the order is received and processed you then receive payment for referring the customer to the drop-shipper. Alternatively you get paid for the order first, and then pay your supplier to ship the product to your customer.

This business model can operate with everything from t-shirts, to mugs and larger items such as electronic devices, or even furniture. Basically, anything that you see manufactured by a certain type of company can be shipped directly to your customers, with you acting as a type of middle man or referral agent.

Operating a business of this type requires very little in the way of initial investment, and can be literally run from your kitchen table during any free time you might have.

Drop-shipping is very different to the Fulfillment by Amazon (FBA) model in that with FBA there is a financial commitment on your part to have your products manufactured and then shipped to the Amazon warehouse. This means if you decide to have 5,000 pieces of a product manufactured, and they don’t sell, then you’re left with 5,000 products that are worth nothing to you.

With drop-shipping you never have to pay for the products in advance, so you financial risk is almost zero.

How to Make Money from Drop Shipping

One of the most popular aspects of operating a business of this type is that you can come up with an idea for a product, research the market and have your website or Facebook page promoting that product the same day.

Once upon a time drop shipping was about distributing massive catalogs to homes, and hoping that people would order enough from the catalog to pay you a meager income.

The Internet has revolutionized this business model several times in the last two decades, first with the ability for small business owners to create their own website to promote dropshipped products, and then a second business model evolution with the growth in popularity of social media platforms.

In fact, social media networks like Facebook are now providing a whole new audience for drop-shipping marketers.

You can profit from drop-shipping in a number of different ways. The first of these is to operate your own website, promoting a range of products to your target market. You can pass the orders directly to your wholesaler or manufacturer, and let them ship the item to your customer.

Alternatively you could choose an ecommerce platform such as Shopify.com to build your drop-shipping business on, minimizing the amount of technical work you need to do, including website maintenance.

A typical example of how you might profit from drop shipping is by finding a niche in a hungry market, nationally or internationally. Let’s imagine that you want to sell solar-powered lanterns (they exist, honestly) to the emergency prepper market. Looking online you notice lanterns of this type are retailing for $75, so you already know what margin you have to work with.

You search for online wholesalers and manufacturers of this type of product, and shortlist those who seem like a good fit in terms of price and product. You then come to an agreement with your dropshipper of choice, who offers you a wholesale price of $35 on each lantern, leaving you with $40 gross profit.

The wholesaler then provides you with images and a product description of the solar-powered lantern to upload to your website. This is a very basic example, but it also demonstrates just how straightforward drop-shipping can be.

Those of you with a creative side will also be interested in hearing that companies like TeeSpring and CaféPress can drop ship t-shirts, mugs and hoodies to your customers. Why would you bother selling t-shirts and hoodies for a few bucks each? Well, because if one t-shirt goes viral on social media it can lead to hundreds of thousands of sales.

TeeSpring has been quietly responsible for the creation of the Internet’s first few t-shirt millionaires – all done through the power of drop-shipping.

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If you already have a website selling products via affiliate offers then you could add drop-shipping to the mix, allowing you much higher margins than you could ever hope for with just affiliate commission structures.

How Much Can I Make from Drop Shipping

Your drop-shipping business can be as big or small as you want it to be. If you only want a part-time business that you can run on the side then this business model will suit because you don’t need to invest all your free time in it.

If, on the other hand, you wanted to start by earning a few hundred dollars a month, but with the aim of growing that to 7-figures a year, that is entirely doable with this business model.

In fact, we know of several people who started a drop shipping business from their spare room, only to see it grow to twenty employees, and their own warehouses within 2 years of starting up.

Entrepreneurs need to approach any business venture with the attitude that anything is possible, and with dropshipping you can scale this type of business to earn thousands of dollars per year, or millions of dollars each year – it’s entirely up to you.

Examples of Drop Shipping Websites

HouseofRave.com

Even though the 1990s are now just a distant memory there is still a demand for rave/EMD/dance products from customers all over the world. The range of products includes glow sticks, strobe lights, and anything else you might need for a rave.

Each of the products is shipped directly from the wholesaler to the customer, and because the products cost so little customers tend to buy multiple items at once. This business is a stroke of drop shipping genius. Here is a snippet from their About US page that explains their business in a nutshell:

About HouseOfRave.com:

HouseOfRave is an online retailer specializing in light up novelties. Many of our items are extremely rare and hard to find products imported from across the world. We also manufacture and license some of our own products. HouseOfRave officially opened it’s online doors in early 2001, and we have be scouring the globe for the latest in light-up toys and technology ever since. Since our opening we have grown every year, becoming the online leader in light up novelties.

Pay close attention to the “extremely rare and hard to find part” as this is what makes House of Rave such a success. If you set up a drop shipping business that sells items people can get at their local Walmart you are doomed to fail.

ReadySetGoKits.com

And, once again we have the emergency prepper market appearing in our guides. The reason for this is that even the most moderate families are starting to realize that being prepared doesn’t mean you’re crazy – being unprepared does, though. ‘Ready Set Go Kits’ are pre-prepared emergency kits designed for a number of different scenarios, with kits for every member of the family, including Fido the dog and Mr. Snuggles the cat.

Zappos.com

The biggest drop shipping success story has got to be Zappos.com. Yes, the mighty Zappos started out as a drop-shipping business first until they could afford to start investing in inventory, and expanding their business. Originally founded in 1999 by Tony Hsieh, it had grown to revenues of hundreds of millions of dollars each year before it was acquired by Amazon for US$1.2 billion in 2009. This shows what’s possible for any drop-shipping start-up.

Getting Started With Dropshipping

Cost to Start a Drop Shipping Business

The amount of money required to set up this type of business is marginal, with many drop-shippers starting off with just $100 and a laptop. Your expenses will either be to buy your domain, and set up your own website, or you could use an ecommerce platform like Shopify instead.

In the case where you decide to set up your own website then you can expect to pay $10 for your domain, and around $500 for a professionally designed business website. If you chose to go the Shopify route you’re looking at paying out $29 per month to take advantage of one of the ecommerce platform most popular with drop-shippers.

What You Need to Start a Drop Shipping Business

The key ingredient for any drop-shipping business is to have access to a directory of wholesalers and manufacturers. These are the same companies who will ship their products directly to your customers.

There are a number of drop-shipping directories you can invest in, but it’s also a good idea to attend business trade shows in your market, because many of the companies you’re looking for will have stands there.

One of the most popular directories (Worldwide Brands) of wholesalers and manufacturers retails for $299 for lifetime membership, so you’ll need to factor this type of cost into your start-up budget.

Best Drop Shipping Training Courses

Store Coach

Store Coach is an incredibly comprehensive e-commerce training program by Dave Hermansen. While the course's main focus is on the Drop Shipping business model it also includes information on running a more traditional e-commerce store as well, i.e. if you want to buy in bulk and physically stock items in a warehouse or have your own products custom made.

Here's the cool thing about this course – much of the training is free! There is a paid upgrade which will give you access to advanced tips and tricks, and some cool software that will make your life easier, but the free training is a great place to start if you are new to Drop Shipping.

The Pro membership is $49 a month and includes access to a members forum, which is a great way to get direct access to the “Coaches” as well as other members with a bit more experience as you.

Dropship Blueprint

Dropship Blueprint is a very well laid out course designed for beginners. It does a great job of teaching you everything you need to know to set up a drop shipping business from finding suppliers to writing sales copy for your product listings. What it doesn't do very well is give you the in depth, advanced strategies you will need to really kill it with drop shipping.

That is not necessarily a bad thing as newbie internet marketers have a tendency to want to run before they have even learned how to crawl! This course does a great job of laying the foundations you will need to eventually scale up without distracting you with advanced strategies (that quite frankly can get a bit confusing even to advanced marketers).

Udemy Courses

How Long Will it Take to Make Money With Drop Shipping?

One of the reasons why drop shipping is such a popular business model is because there’s very little involved in starting this type of business. It’s difficult to give you precise timeframes on when you’ll make money, but with the example of TeeSpring earlier you can be making money from a successful t-shirt design in under 24-hours.

You can use paid search traffic from Google or Facebook to send visitors to your ecommerce site within minutes, so in theory your drop-shipped products could make you money overnight.

A more realistic take on this is that when a customer orders a product it will take 8 – 21 days for your customer to receive it, so you can really only count the profit once a customer receives their order, and is happy with it.

So, based on that, a new drop shipping business can be profitable in less than 30 days.

Pros of Drop Shipping

There’s very little technical knowledge or experience required to get started

You have almost zero start-up costs

There’s no need to keep inventory of your products

You can offer products from different wholesalers from one website

You can start small and grow the business to whatever size your heart desires

This business model allows you to focus on attracting customers to your website

Cons of Drop Shipping

Margins have to monitored very carefully if you hope to make money – margins on products can be very low so there’s no room for mistakes